Dow At Major Support – Don’t Get Stopped Out By The Key Reversal

By Chris Diodato

Here I attempt to do the only thing more impossible than the impossible.  That is, not only predict where the market is going, but predict how it will occur.

Today's price movement showed what looked like a breakdown from a double top formation.  This pattern breakdown gives a target of about 13,050 on the Dow, however, I do not believe this level will be touched.

Levels in the RSI often indicate support levels when touched, even if the price level at that point is not already known as a specific "support" point.  If you look at the picture below of the Dow, you'll notice that price has tended to reverse back upward every time the RSI has touched the "35" level.  In addition, at these major bottoms, there was also a large, red candle like today.


Notice, that while the RSI tended to bottom here, there was always an intraday low made after that point.  This low was most often a "spike," which eventually formed a bullish key reversal .

So do I believe we will have a "spike?"  Yes, and if not tomorrow, very soon.  With news of the Spanish debt downgrade by S & P this evening, we have a perfect environment for a temporary panic tomorrow morning.  Where will the spike terminate?  Assuming that we see a key reversal day by days end, the most likely target is at exactly 13,249 on the Dow.  Below that, there is not much support, and then I would become significantly more bearish, with the next support level all the way down near 13,000.  See the chart below for the Fibonacci confluence zones I am speaking of.  I placed a rectangle on top of the immediate target zone.


For those versed in Elliott wave, this would be the culmination of a "flat" correction, which would indicate the end of a wave four.  Yes, that means the market gets one last gasp before the market starts to experience some more troublesome problems.  If tomorrow is a key reversal, it gives a time target for the final top on October 26.  For every day we don't see a flat market, move the time target forward one day.

Happy trading!

~Chris Diodato

Metrotrader (D) is one of the few practicing CMTs (Chartered Market Technicians) in the United States . The CMT certifies his knowledge of market timing and risk management approaches. He tends to look for broad market moves and take advantage of them with index funds. The strategy he principally uses is mostly quantitative, and, tested, and has avoided or capitalized on every major recession since the 1940s. He says the best way to make money is to avoid losing it in the first place.

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